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Silly Money Printing, Negative Real Interest Rates And Restricted Supply Form A “Great Scenario For Gold”

July 29, 2017

Mike Gleason (Money Metals Exchange): It is my privilege now to welcome in Frank Holmes, CEO and Chief Investment Officer at U.S. Global Investors. Mr. Holmes has received various honors over the years, including being named America's Best Fund Manager for 2016 by the Mining Journal. He is also the co-author of the book The Goldwatcher: Demystifying Gold Investing. And is a regular guest on CNBC, Bloomberg, Fox Business, as well as right here on the Money Metals Podcast.

Frank, welcome back and thanks for joining us again today. How are you?

Frank Holmes (U.S. Global Investors): Outstanding.

Mike Gleason: Well, I'm looking forward to getting into some of these questions with you today, and to start off, I know you've had a lot to say about gold here recently in following your market commentaries and your Frank Talks like I do. Now before we get into some other stuff, including the exciting new gold fund that you've just launched there at U.S. Global Investors, let's talk first about where we are in the metals right now. We saw prices heading higher earlier in the year, and then correcting lower more recently, but gold has really hung in there over the last month or so and it's seemed to have found strong support in the low $1,200s. What do you make of the market action here recently in the metals, Frank?

Frank Holmes: Well, I think a big factor is real interest rates, and what's happening in the bond markets around the world. A, debt levels are going through record highs. We saw money supply in EU, they jumped 5% in a month. It doesn't matter, they're just printing this money, but it's stimulating their economy and that's all they care about. And I think that you're seeing this witness of this proliferation of paper money. You are witnessing that they're manipulating real interest rates to be negative, and that is always good for gold.

You're then seeing in the U.S. that even with rising interest rates, the dollar had one of its biggest declines last quarter, up over 3%. So, gold is rising in U.S. Dollar terms for different reasons than the rest, but it is to me, a real positive factor. We have global growth is being ignited from Europe, it's good in Japan, and this is also good for the backend of gold. Then, I think the supply side is being restricted, and this silly tax in Tanzania of over hundreds of billion dollars. It's just outrageous what these countries are doing.

You see it in Latin America and you see it in Mongolia and now it's in Africa. They want money to come into these countries, they move the goalposts. There's no fiscal stability, there's no tax regime that's disciplined for at least 10 years so you're trapped capital. So, I don't think you're going to see supply coming onsite, so I think the world anticipates supply is actually peaking. We look at the gold production of the mines today, and you're seeing that no more capital is going to come into these high-risk countries, no fly zone, and you're seeing this continuous printing of money and negative real interest rates. It's all a great scenario for gold.

Mike Gleason: Expanding the point here on the Fed specifically, the FOMC is meeting again this week. Janet Yellen is taking a more dovish posture, but lots of people still expect another rate hike or two before year end. What are you expecting here, Frank? Is the Fed basically done in your view?

Frank Holmes: Yes. The Fed is done, and in fact, I thought it was interesting that it just recently came out hot on the wire today that the Fed is going to be more about getting rid of some of those bonds they own in the marketplace, rather than raising interest rates now, to de-risk their balance sheet. But I think that they have to be very sensitive on that. So, I don't think it's really going to happen to any great degree, because you would have rates rise for anyone who'd want to buy those bonds, and the financial market itself. So, I think we're in a very precarious situation.

President Trump believes a weak dollar is good for exports, and that's what we're seeing. The exports are pretty attractive in the U.S. Anytime you have a weak dollar's fantastic for Boeing. Have you looked at Boeing's chart? I mean, it's a beautiful 45-degree angle, so the world is going to be buying Boeing, and it makes it more competitive against the Airbus. And I think this is so important because they're high paying jobs and their export business is picking up.

Mike Gleason: Speaking of the dollar, metals should be getting some help from the weakness in the U.S. Dollar. The DXY index peaked in December and has been trending lower ever since. We now sit at the lowest levels in two years, but metals on the whole aren't really reflecting that trend, at least not yet, or not in a meaningful way, or as much as you'd expect. What are your thoughts on why and what do you see in store for the dollar in the months ahead?

Frank Holmes: Well, I think the big concern is the infrastructure spending. President Trump has not been able to get through many things in the beltway, and he's up against the beltway party, which is all the government agencies, along with all the lobbyists. And so, this is real evident from Obamacare which they all wanted to make changes to and they couldn't get their act together twice. The only thing I've seen where he's laid off, they fired 200 government workers in the VA Department, just terrible employees. But that seems to be the only agency that's taken place that's taken place with.

There's been no streamlining except for he's passed a law that you have to cancel two for opening one new law, but I think that maybe slows down what was on steroids, was every government agency putting through so many regulations and rules which was stymieing the economy. So, I think that this infrastructure, if we get the infrastructure bills passed, and that's what he should have focused on in the beginning in my opinion, and not personal tax but corporate taxes, because they're not lightning rods for lots of negative publicity.

Personal income taxes, the rich versus poor debate comes up in the media, and so that just makes it more difficult. But corporate taxes to be globally competitive, that would be easier to float. And I think the infrastructure spending would be easier to float. The last big boom in infrastructure spending was China, with great Gorges Dam, and other projects throughout their country, but there's nothing of significance that would be beneficial to all the metals and resources like we had from 2001 to 2007.

Mike Gleason: Another potential catalyst for higher gold prices may be the theater surrounding the hiking of the debt ceiling in Washington. Congress is going to wrestle over whether or not to raise the borrowing limit again soon. Do you think we may actually see a real fight or will the Republican leadership manage to push the hike through without much fuss? And then as a follow-up, what kind of market reaction should we expect in gold?

Frank Holmes: I think the same conservative Republicans will be as disruptive as they were for Obamacare as they are for budget. They are very rigid and I was at a conference and I was hearing Alex Green speak, and his comments were that the different between Democratics and Republicans is that Republicans want to have freedom of your money and economics, but they want to control your social and personal agenda. Whereas the Democrats want to have freedom of social personal life, but they want to control your economics. And the fringes on both sides of that is what seems to be dictating or controlling the policies that are frustrating to mainstream America. I thought that was well put.

Mike Gleason: Switching to gold stocks here, and before we get into your new fund, Frank, are we entering a new rally phase after having successfully held above the key $21 support level on the GDX?

Frank Holmes: Well, two things. We're in the seasonal pattern where gold starts its rally through the summer and rallies with down dips and corrections, but it's usually from here up to the Chinese New Year, a succession of higher highs. But you can still get these gyrations taking place and downdrafts. So, that's important to witness, but I think the wind is at your back, not in your face. Two, is the GDXJ, at the end of March, was like collectively with the triple, Direxion, bull and bear, and the GDX, and GDXJ, you add them all up, they were like 17 billion dollars or some big number. And they fell to 12 billion dollars.

You talk about five billion dollars blown out of the gold stocks, and I think the GDXJ has been extremely disruptive to the gold stocks around the world, especially the small mid cap. And it's hurt financings, it's hurt confidence and sentiment. I was speaking at a conference in Vancouver and they just couldn't understand what was going on and I explained to them and then “ah-ha” the lights went off that it was all fund flows. And GDX has been a wonderful success but what's happening in the psychology of investors is they don't want to go and buy, give to an active fund manager. And even though last year we won these awards for our performance in the GDX and GDXJ, they want to go and trade the GDX and GDXJ, and what money would normally be distributed amongst 10 different gold fund managers all went to one fund which is then going to own 20 companies owning more than 20% of them.

So, that triggered all these compliance rules so then they had a blowout of three billion dollars in six weeks. So, what took a year for five billion to go in, three billion gets blown out in a very short period of time, and I don't think a lot of investors are aware that the GDXJ owns a big slug of the GDX. I think it's its biggest investor. It's sort of like the movie "Deliverance." It's hillbilly time here of cross ownership. And so, the movement of these gold stocks has nothing to do with fundamental factors. It has to do with factors of just fund flows, and they have to buy a basket of names.

So, that was the reason why we launched our GOAU, GO Gold, which is an intelligent set of factors based on 8,000 hours of research of seeing what is the best factors for picking gold stocks as a gold analyst. And then also doing a lot of work on the new buyers in the capital markets, which are the quant funds. And they look for different factors, so we wanted to try to identify what do quant funds look for when they're picking stocks, in particular the gold space?

And we've been able to embed that with a set of rules that are dynamically adjusting and adapting every quarter based on results, and when we back tested going back over 10 years, that particular index that we traded outperformed the GDX/GDXJ 95% of the time in rolling 12-month periods. So, I think that we've tried to deal with that as a solution to a problem in the capital markets for gold investors that just want to play the ETFs.

Mike Gleason: Yeah, and doing research on that new fund in advance of this interview, I was very excited about a lot of the things I was reading in there, the U.S. Global GO Gold and Precious Metals Miners ETF… Frank it looks like you have a big emphasis on the streamers and the royalty companies in that fund. Talk about that, and then also talk about how people can maybe get involved in that if they wish.

Frank Holmes: Sure. Well, it's listed on the New York Stock Exchange. It's a simple symbol, GO Gold, GOAU. The element symbol for gold is AU, and I think that we went for the streamers because the streamers have more volatility in revenue, and so we found the stocks that have lower volatility in their revenue and their cash flow get a better rating in the capital markets by any industry. Doesn't matter what the industry is. Other parts that we found what the ratios, when we looked at revenue per employee. When we looked at all the gold stocks and put them all together, et cetera, and we did a test, which if you go to, there's information there. Or go to US Funds(.com), you can get the information of all the research.

And what we found was that they outperformed. If you just take the best 10 names, a mutual fund of any type has to have at least 21 names. It's a very important factor, is this revenue per employee. So, when you look at great firms like Goldman Sachs, has over a million dollars of revenue per employee, and Newmont has $300,000 of revenue per employee, and Barrick has almost $400,000 of revenue per employee. But interesting enough, Franco-Nevada – which has royalties on those two gold mining stocks’ mines in Nevada – it has 17 million dollars of revenue per employee.

So, it has a much more efficient cost of capital, and so with that, the royalty companies have outperformed the GDX and GDXJ. The other part was that GDXJ which really shocked us in our analysis, is that in the past four years, they've been issuing so much stock and financings. Over 100% dilution of issuing shares, but they've not grown the reserves per share or the production per share. So, they've been issuing shares at a rate of 25% a year, so what does that mean to an investor? That would mean that either the price of gold goes up 25% a year, which it's not, or their production rises 25% a year, which it's not, or the reserves per share are rising at 25% per year, and it has not.

So, those stocks are very vulnerable to downdrafts, whereas the royalty companies when they’ve done a financing immediately buy a cash flow. And it shows up that they're just a safer bet. And the last thing is that the little micro-cap stocks, there's a housekeeping seal when a Franco-Nevada or a Silver Wheaton or a Royal Gold buys a royalty in those assets, they're sending their metallurgists, their engineers, their geologists, their whole intellectual brain trust to go and re-vet those assets. It's like a good housekeeping seal, and for us, it was a way to play a lot of small-caps but they were vetted by those three royalty companies.

Mike Gleason: Yeah, very exciting. There's certainly some flaws in those other indexes and I think yours is going to be a great one for people to take part in if they want to get exposure to that space. Real quick follow-up, in your view, do we see the miners lead the bullion or the bullion lead the miners? What's your thought there?

Frank Holmes: I think the miners are going to lead. I think that those companies in particular that can show growth and revenue per share, production per share, cash flow per share, rising price to book, those are going to be the stellar performers. But I think the reasons for that is that the supply of gold coming out of the mines is going to continue to become more scarce, and shrinking supply has always been a catalyst for higher a commodity price. And the runaway printing of money I think that's going to be just a factor of the continued consumption of gold by China, India. We also see the Russians are continuing to be buyers of gold, because they're witnessing the currency devaluation with this money printing globally. So, I think that that's going to be a key factor.

And then when we look at these cryptocurrencies. To me, they're so fascinating – not so much about them having taken off, although a couple of them have, in particular, Ethereum and Bitcoin, and Bitcoin has been spectacular – but it's really much more about the paper printing of the other countries. Since these digital currencies have landed in the marketplace, if you take a look, they're limited in the supply that they can issue. However, the G20 countries have been printing money at an incredible rate, and their balance sheets with buying back their own bonds.

I mean, they're the biggest buyer of their own bonds and it's been brilliant to see what the Swiss have done, and the Japanese. They've been issuing this money at zero interest rates, and they turn around and take money, they create and print money themselves, and they go buy their own stocks. So, the biggest shareholders in Japan, South Korea, I believe, and also in Switzerland are the central banks. It's unheard of. Because they recognize that this cheap money has to buy real assets. So, I think that the phenomena of these digital currencies is more a reflection of the lack of confidence in governments that are just printing money as sort of a silly behavior. And I think that the gold market is going to have its point where it just spikes to another level. So, I feel very positive regarding gold.

Mike Gleason: Well, we'll leave it there. That's fantastic stuff as usual Frank. We appreciate your insights and it's always great to hear your thoughts and we really appreciate your time once again. Now, before we let you go, please tell listeners a little bit more about your firm and your services and then also plug the wonderful Frank Talk blog if you would, because this is an absolute must read for anyone listening to this podcast.

Frank Holmes: You're so kind. I thank you very much. It's Subscribe to Frank Talk and Investor Alert. It's won many awards. When we go up for competitions in the fund world against Fidelity and the Vanguards, which most people know of. It (the Frank Talk blog) is written by portfolio managers, and edited by journalists who are internal. We're very proud of what we create, and it helps us. It helps me, I'm traveling around the world to relate to investors what I'm seeing and what I think some of the economic benefits are, and risks are. Because we always believe at US Global, in all of our prospectuses that, that government policies are a precursor of change, and it's important to recognize what those policies are.

So, with that, just go to I'd love to see you become subscribers, and if you have any ideas or thoughts, please feel free to send it into us.

Mike Gleason: Well, excellent stuff. Thanks as always for your time, Frank. Congratulations on the launch of the GO Gold and Precious Metals Miners ETF. Continued success there, and keep up the good work with those great market commentaries. I hope you enjoy the rest of your summer and I look forward to catching up with you again sometime in the fall. Take care.

Frank Holmes: Take care.

Mike Gleason: Well, that will do it for this week. Thanks again to Frank Holmes, CEO of U.S. Global Investors, and manager of the new GOAUX gold fund. For more information, the site is Be sure to check out the previously mentioned Frank Talk blog while you're there for some of the best market commentary you will find anywhere on gold and other related topics. Again, you can find all that at, and you can also go to for more information on that new gold fund.

Mike Gleason is a Director with Money Metals Exchange, a national precious metals dealer with over 50,000 customers. Gleason is a hard money advocate and a strong proponent of personal liberty, limited government and the Austrian School of Economics. A graduate of the University of Florida, Gleason has extensive experience in management, sales and logistics as well as precious metals investing. He also puts his longtime broadcasting background to good use, hosting a weekly precious metals podcast since 2011, a program listened to by tens of thousands each week.

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